Insider Trading Thrives in Congress

Congressmen are investing hundreds of millions of dollars in stock in companies over which they have oversight. And it’s perfectly legal.

WaPo (“Members of Congress trade in companies while making laws that affect those same firms“):

One-hundred-thirty members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules, a Washington Post analysis has found.

The lawmakers bought and sold a total of between $85 million and $218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007 to 2010.

Almost one in every eight trades — 5,531 — intersected with legislation. The 130 lawmakers traded stocks or bonds in companies as bills passed through their committees or while Congress was still considering the legislation. The party affiliation of the lawmakers was almost evenly split between Democrats and Republicans, 68 to 62.

Sen. Tom Coburn (R-Okla.) reported buying $25,000 in bonds in a genetic-technology company around the time that he released a hold on legislation the firm supported. Rep. Ed Whitfield (R-Ky.) sold between $50,000 and $100,000 in General Electric stock shortly before a Republican filibuster killed legislation sought by the company. The family of Rep. Michael McCaul (R-Tex.) bought between $286,000 and $690,000 in a high-tech company interested in a bill under his committee’s jurisdiction.

The trades were uncovered as part of an ongoing examination by The Post of the intersection between the personal finances of lawmakers and their professional duties. Earlier this year, Congress responded to criticism of potential conflicts of interest by passing the Stock Act, which bars lawmakers, their staffs and top executive branch officials from trading on inside information acquired on Capitol Hill.

But the act failed to address the most elemental difference between Congress and the other branches of government: Congress forbids top administration officials, for instance, from trading stocks in industries they oversee and can influence. The lawmakers, by contrast, can still invest in firms even as they create laws that can affect the bottom line of the companies.

“If you have major responsibility for drafting legislation that directly affects particular companies, then you shouldn’t be trading in their stock,” said Dennis Thompson, a professor of public policy at Harvard University’s John F. Kennedy School of Government and author of “Ethics in Congress: From Individual to Institutional Corruption.” “Committee chairs especially shouldn’t be in the position of potentially benefiting from trades in companies that stand to gain or lose from actions the committee takes.”

The Post analysis does not provide evidence of insider trading, which requires showing that lawmakers knowingly used confidential information to make trades benefiting themselves. Instead, the review shows that lawmakers routinely make trades that raise questions about potential conflicts and illustrate the weaker standard that Congress applies to itself.

Foreign Policy managing editor Blake Hounshell, who pointed me to the story, declares, “Congress is disgusting. Americans should be outraged at this kind of stuff.” While I’m not sure I’d go that far, this is certainly a situation where an obvious conflict of interest exists and yet another case where Congress applies one set of rules to itself and another to the rest of us.

To be sure, an individual member of Congress has less influence over policy than, say, a cabinet secretary. There are, after all, 435 Representatives and 100 Senators and we have a cumbersome legislative process requiring bills to pass through both Houses in identical form and get signed by the president before becoming law. Still, committee chairmen and other Members have enormous influence. Even, even if we were to presume that all of them are of the highest integrity and would never vote against the interests of their constituents for personal profit–work with me here–it’s not right that they should be able to buy and sell stocks on inside knowledge, behavior that is criminal when done by anyone else.

What’s also interesting is that, even if we take the low end figure of $85 million, that’s a lot of investing by 130 Members–and that’s only money directly going in to companies where they have regulatory oversight. That means they’re each investing on average $653,846.15–some four times their average annual salary. Granting that some Members come to Congress as multi-millionaires and the study includes “families” in the mix, that’s at the very least worthy of a raised eyebrow.

It’s often been said that the real crime is what’s legal. This is a classic case.